Bush To Obama-The Car Problem Is Yours Now

Unless the original Henry Ford rises from his grave to remake the U.S. car industry, this is the last post I’m going to write on the subject for a while. But we do need to put a bow on everything that has transpired.

First things first. George Bush gave the Detroit auto companies life at least until the 31st of March. He committed to a $17.4 billion loan to GM and Chrysler. The loan has an interest rate of around 5% and does entitle the government to some warrants. The financial details of the loan package aren’t really that important because, as you will see, this package is not going to survive in its present form.

What is important are the conditions attached to the loan. The auto companies have to do the usual penance; give up their jets, cut executive pay, eliminate dividends etc. But they also have to reduce their debt by two thirds via a debt for equity swap, make wages competitive with foreign car companies manufacturing in the U.S., negotiate new deals with dealers and suppliers and have a positive net present value by March 31st. Keep in mind that all of this has no force of law. Congress has passed no law. It is more akin to a private bank loan. The only real hammer the government has is to call its loan.

Now the car companies as well as all of us know that on January 20th there is a new sheriff riding into town. He has played his cards close to his vest so far, but he does owe the unions big time, so the betting at least on the union side is that they can renegotiate. The company executives know if that game starts that they’ll get a seat at the table as well, so Bush’s loan is likely to be amended well before any deadlines approach.

In the meantime, foreign governments are looking at these developments in horror. The handwriting they see on the wall says that the U.S. is going to create government subsidized auto companies that will have a cost advantage over their own industry participants. Their getting boxed into assisting their companies in order to keep them viable in the U.S. market. 

So sometime in early February, the pressure is going to be on Barack Obama. Does he hold the companies, unions and affiliates to the terms of the loan and quite probably force them into bankruptcy, since the likelihood of meeting the terms is slim, or does he get squeezed politically and cave. If he does give in how big a ward of the state does he intend to create.

Really, the government’s decision this morning was just the first move on the chess board. It keeps GM and Chrysler alive until someone else can sit down and draw up a new scheme. The terms of the loan that was agreed upon today mean absolutely nothing.

more: here, here and here

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